Charlie Munger’s Lasting Influence on Berkshire Hathaway’s Investment Philosophy

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Charlie Munger, the vice chairman of Berkshire Hathaway, passed away on Tuesday at the age of 99, leaving a profound impact on the investment philosophy of the conglomerate and its iconic leader, Warren Buffett. Munger played a crucial role in redirecting Buffett’s investment strategy from buying distressed companies at deep discounts to focusing on strong-brand quality businesses.

Buffett, often referred to as the “Oracle of Omaha,” initially followed a value investing approach learned from Benjamin Graham, buying cheap stocks akin to picking up discarded cigar butts. However, Munger influenced Buffett to shift towards buying wonderful businesses at fair prices rather than settling for fair businesses at wonderful prices. This change in strategy became the cornerstone of Berkshire’s growth into a diverse empire encompassing first-class businesses in insurance, railroad, retail, energy, and manufacturing.

In his 50-year anniversary letter in 2014, Buffett acknowledged Munger’s pivotal role, stating, “It took Charlie Munger to break my cigar-butt habits and set the course for building a business that could combine huge size with satisfactory profits. Charlie’s most important architectural feat was the design of today’s Berkshire.”

Buffett recalled Munger hitting him “over the head with a two by four” to emphasize the limitations of the cigar-butt investing strategy. Munger advocated for seeking out wonderful businesses that could be acquired at fair prices, challenging the notion of buying mediocre companies at very cheap prices.

While there was no clear demarcation in Berkshire’s transition from cigar butts to wonderful companies, the acquisition of See’s Candies in 1972 marked a significant shift in strategy. Munger convinced Buffett to approve the purchase of See’s Candies for $25 million, despite its modest annual pretax earnings of around $4 million at the time. This acquisition has since generated over $2 billion in sales for Berkshire.

Buffett acknowledged the evolution in Berkshire’s investment approach, stating, “Overall, we’ve kept moving in the direction of better and better companies, and now we’ve got a collection of wonderful companies.”

Charlie Munger’s enduring influence on Berkshire Hathaway’s investment philosophy remains a testament to the collaborative partnership between Munger and Buffett, shaping the conglomerate’s success over the decades.